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Why Retailers are Headed into Industry 4.0 With the Wrong Mentality

Acronyms like B2B, B2C and even C2C have been around the block a few times, but there’s a relatively new kid on that block: C2B.

What it means, is that consumers are running the show, naming their own prices, dictating the product they’ll buy, sharing their data and insights, and enjoying the benefits of personalization and flexibility, plus services like free shipping in a sort of “exchange” for all the knowledge they provide to companies.

The industry knows now that the “build it and they will come mentality” is defunct—it’s more like “let’s find out what they want before we build anything, and then give them that thing.”

As Edwin Keh, CEO of the Hong Kong Research Institutes of Textiles and Apparel (HKRITA), explained during a keynote at the American Apparel & Footwear Association’s Supply Chain Innovation sourcing conference in New York City last week, “It’s a really disruptive model…and it’s one of those things you can’t do unless you have a lot of information about the market.”

(Read more about what came out of the AAFA conference: The Present State of Supply Chains and What You’ll be Facing in the Future)

In this new Industry 4.0, consumers will decide nearly everything and on-demand manufacturing will be a norm, which begs the question: what should retailers do between this turning point of disruption and the apparel industry of the not-too-distant future?

The first step in answering that question, according to Keh, is to acknowledge that embracing Industry 4.0 doesn’t guarantee success; rather, it gives companies an opportunity to be successful.

“Doing things that we’re doing right now really means that we’re headed for a slow decline,” Keh said. “If companies don’t go beyond optimization or move with society, new entrants will bump them out.”

Industry 4.0 as Keh explained, is based on linking real objects (like apparel) with virtual objects and processes via information networks (like the Internet). There are nine key technical techniques that serve as the backbone of Industry 4.0: artificial intelligence, industrial Internet, industrial cloud computing, industrial big data, industrial robot, 3-D printing, knowledge work automation, industrial network security and virtual reality.

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“We’re at this inflection point,” Keh said. “For our industry it means turbulence. This is where we fasten our seatbelts because stuff is going to happen now.”

If you look at a handful of brick-and-mortar retailers’ market value between 2006 and now as Keh explained citing Yahoo Finance data, Sears’ value has plunged 95 percent, J.C. Penney’s value is down 83 percent, Kohl’s dropped 59 percent, Macy’s is down 46 percent, Nordstrom sank 25 percent and Target is down 15 percent. Of the nine retailers Keh looked at, just Walmart and Amazon were in the black, with Walmart’s value increasing 2 percent since 2006 and Amazon’s value increasing an outrageous 1,910 percent in the same time.

That’s why retail is facing this abysmal state of things, with one retailer after the next filing for bankruptcy or closing hundreds of stores—very often, both.

“This decade has not been a good decade for traditional retailers,” Keh said.

What’s more, the apparel industry is one of few where goods continue to get cheaper and cheaper. And cheaper.

“Things are now 60 percent cheaper than it was in 1996,” Keh said. “It’s a tough market to be in.”

And part of the reason retailers can’t seem to climb out of this ever-enlarging rut, is that the majority are simply selling the wrong thing.

“We are selling hardware in a marketplace that values software and data,” Keh said. “The challenge is to rethink what we’re selling.”

Of course, the one retailer that seems to have really figured this out is Zara.

Compared to a specialty retailer he didn’t name, Keh said Zara has lower prices and higher production costs, but gross margins that are 55 percent greater and sales of roughly 30 percent more units per square foot.

“It’s not so much this obsession with FOB and driving prices down, it’s how smart you are in communications,” Keh said referring to having effective, efficient communication all along the supply chain. “This [the Zara model] is just making smaller mistakes and correcting them faster.”

The manufacturer of the future, according to Keh, may not even recognize his present day counterpart. Before long, the companies that still want to make it will have rethought—and restructured—everything to make sense in modern times.

For one, they will have rethought how they manufacture.

“We live in a world that demands continuous manufacturing and we still continue to manufacture in a batch processing sort of way,” Keh said. It’s time to think of manufacturing in a new way, to look at things like, “How can we have a less energy-intensive, less material intensive supply chain?”